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Exide (XIDE)
 A Distressed Company,  or An Intriguing Investment ?
by Shirley Georgi

It’s an anniversary for Exide.  Four years  ago (April 15, 2002),   Exide Technologies petitioned to reorganize the company under Chapter 11 of the U.S. Bankruptcy  Code.  In connection with the filing, the world’s largest independent  producer of  Lead-acid batteries received a commitment for $427.5 million in new financing, and Craig Mulhauser, President and CEO, began to implement a restructuring plan for the Company.    On May 5, 2004, the Company emerged from Chapter 11.  Mr. Mulhauser, still at the helm, said, “The Company remains committed to successfully implementing our restructuring plans while improving our operating cash flow, driving cost reductions, improving quality, developing new business and mitigating the impact of increasing lead prices to our financial results... We have the financial foundation in place to support our future growth and profitability.” Was it a profound statement or a wishful thought? It is time to take a look at just how the company is performing  both in  its successes and struggles to remain  a giant in the battery industry.

Events prior to Chapter 11

Perhaps the problems surfaced in 1998 when Chairman, President and CEO Arthur M. Hawkins and Executives Alan Gauthier and Douglas Pearson  were forced to resign  from Exide in October.  Charges against the former executives included conspiracy to defraud the United States and defraud by wire.  The charges stemmed from allegations that Exide executives lied to secure a large contract with Sears, Roebuck & Co. in 1994, which also involved more than $100,000 in alleged bribes to a Sears battery buyer.   It wasn’t until July 2001 that the culmination of legal proceedings brought about an  indictment of Hawkins, Pearson and Gauthier.

Although there have been a few days when the bulls have shown some strength,  the bears have been on the winning team and have caused the stock to tumble since Exide’s emergence from bankruptcy. Selling for almost $25.00 per share in April 2004, the stock  slid to level of $2.83 on April 13th, 2006.  In comparing the stock price from March 31, 2005 to March 31, 2006,  there was a 77% decline. +

But the actions and resignations of these officers in 1998  plus the ensuing legal actions cost Exide precious time and dollars in several investigations and lawsuits, all based upon the conduct  of these former officers.  These included investigations by the United States Attorney General for the Southern District of Illinois  by the U.S. Securities and Exchange Commission  and by three state attorney generals, as well as more than a dozen lawsuits filed on behalf of various private parties.  Altogether, these exposures cost Exide more than $50 million.  

Bob Lutz took over the CEO reigns at Exide after the shattering of the Hawkins “team.”  He envisioned an acquisition of GNB Technologies to boost Exide’s market share.  On May 1, 2001, the acquisition, costing $368 million  from Pacific Dunlop was complete. As a result of this acquisition, Exide was to realize about $3.2 billion in annual revenues.  GNB Industrial Technologies, renamed GNB Industrial Power, was to give Exide strength in the network power and motive  power businesses (the industrial battery market).

Bob Lutz also saw cost cutting as an essential measure.  And with the consolidation of the two companies, Exide closed 27 of the combined company’s branch locations, cut 300 employees and downsized the corporate office.  

The company also began to study and implement lean manufacturing techniques to reduce inventory. As a result,  total inventories, bogging down profit,  began to decline.  At the end of the fiscal year (03/31/01) total inventories had decreased from $511.41 million to $404.67 in the same period a year later.  By  March 31, 2005, inventory levels had dropped even further to $397.69 million.  But as Gerry Woolfe editor of Batteries International,   noted  when he  visited a GNB facility in the spring of 2002, the  lean manufacturing techniques were  a “little too late.” Even so, as HooversTM reported in their overview, “Exide emerged from Chapter 11 bankruptcy in 2004 a leaner organization.”   

It is difficult to measure apples with other apples in the accounting of Exide’s financial statements (i.e., balance sheets)  over the past four years because  after its emergence from bankruptcy, the results of the first quarter of 2005 reflect the implementation of Fresh Start accounting.  In the Company’s conference call  on August 12, 2004,  the following statement was made.  “Adopting Fresh Start reporting has resulted in material adjustments  to the historical carrying values of the Company’s assets and liabilities and has required the Company to allocate the reorganization value to its assets based upon estimate fair values.”  However,  even though there are “accounting variations,” specific factors and facts can be  reviewed to better understand the  health of the company.  

Microsoft Excel ChartThe figures represent reporting of all member companies of Battery Council International adjusted to encompass the total industry.

Sales and EBITDA

On the positive side, total sales for Exide have increased from fiscal year (FY) 2003 through 2005 with final figures   going from  $2.4 billion to $2.7 billion, respectively.   But the bubble bursts when the adjusted EBITDA (earnings before interest, taxes, depreciation, amortization and restructuring charges)  figures are included.  Beginning with FY 2003, the adjusted EBITDA was $178 million declining to $106 million by 2005.  

Adjusted EBITDA is  an important aspect of Exide’s accounting.  The company notes that “it is a meaningful measure of the of the Company’s performance, as interest, taxes, depreciation and ammortalization can very significantly among companies due in part to differences in accounting policies, tax strategies, levels of indebtedness, capital purchasing practices and interest rates.”  Adjusted EBITDA can also be used for assisting management in regulating operating performance as well as monitoring operating performance under the Company’s senior secured bank facility.  Executive compensation may even  be tied to the figures.

In reviewing the third quarter financial results of 2006 (ending on December 31, 2005) , the adjusted EBITDA decreased to $41.1 million from $52 million when compared with the same period in the prior year.  In explaining this figure, Exide noted that the results were driven principally  by lower sales in the European Transportation business as well as the absence of some “one time items that benefited the Company during the prior-year period.”  Negative currency impacts were also mentioned.  

For each quarter, the EBITDA numbers reflect on the positive or negative reasons for growth or declining profits.  Property damage, deferred income, insurance reimbursements, rising manufacturing costs, and variations in distribution costs are just examples of what Exide has listed as explanations for EBITDA figures  over the past year.

Microsoft Excel ChartThe forecast with slight growth tends includes the following categories of batteries: car & light commercial, heavy duty, marine, general utility, golf car/scrubber and a few miscellaneous batteries. It does not include motorcycle batteries or industrial batteries. (Data presented is  based on information from Battery Council International. The “Battery Shipment Review and Forecast” was presented at the 117th Battery Council International Convention, 04/05 by Jim Jelin, Vice President Marketing and Retail Sales, Exide Technologies. ) +

The EBITDA  plays a crucial role in the fourth quarter of FY 2006, ending March 31, 2006. Exide will be in default of its senior credit facility if its EBITDA is lower than $123 million for this quarter. In  March , Exide announced it had lowered its fourth quarter EBITDA  in the range of  $105 million to $110 million, down from $123 million which was previously stated.   The Company notes that this figure is due to weak sales of its transportation battery products in North America due to an unusual warm January.  The  8-K filed with the U.S. Security and Exchange Commission also cited a reduction in sales from its Industrial Energy Europe unit following recently implemented price increases. The lowering of the EBITDA has caused Exide to issue a warning statement - “If an amendment or waiver to the senior credit facility can’t  be obtained or cannot be obtained on a timely basis, the company’s business would be significantly and adversely impacted.”  

On March 15th, Exide announced that it obtained an amendment to its senior credit facility.    The amendment included the following:
• Modified covenants relating to trailing twelve month Consolidated EBITDA, as defined in its senior credit facility, as of the fiscal quarters ending March 31, 2006, Jun 30, 2006 and September 30, 2006
• Increased call protection in the event the Company refinances the senior credit facility
• A 100 basis point increase in the applicable margin for the outstanding loans
• An amendment fee of 0.50% of the aggregate amount of outstanding loans and commitments of lenders consenting to the amendment.

A complete list of amendments can be found in the Company’s Form 8-K filed with the U.S. Securities and Exchange Commission.

Adobe Photoshop ImageThe chart is from the presentation, “North American Industrial Battery Market Forecast, given at the 117th Convention of Battery Council International, 04/05. Special thanks to  the author, Bob Cullen, of Hollingsworth and Vose.) +

Corporate leadership

Exide appointed a new CEO and President  Gordon A. Ulsh,  one year ago in April 2005.  According to the 8-K report filed on March 2, 2005 with the U.S. Securities and Exchange Commission,  Mr. Ulsh will receive annual base compensation of not less than $800,000 and a targeted bonus of 100% base salary, which may be greater if justified by performance against goals established by  a committee of the Board of Directions.  Interestingly, for the year 2006, Mr. Ulsh is guaranteed a minimum bonus of no less than $375,000 regardless of whether any performance goals are satisfied.  Mr. Ulsh also received a bonus of $300,000 payable on his first day of employment.   Various stock option plans and restricted stock were also given.

Most recently, February 16, 2006, Exide hired Francis M. Corby as Executive Vice President and Chief Financial Officer.  Mr. Corby is receiving an annual base salary of $400,000 for the first year and is scheduled to be paid $450,00 for the second year of the employment contract.   A target bonus of 50% of base salary for the first year, of which $92,000 will be guaranteed, and target bonus of 100% of base salary for the second year.  Mr. Corby also received stock options and restricted stock, both of which have a two-year vesting period.

Basically, the compensation is much lower than many CEOs of publicly traded companies of the same size.   One positive note is that the Corporate Governance Quotient (CGQR) for Exide as of April 1, 2006 is better than 94.8% of CGQR Universe companies and 75% of Automobiles and Components companies.  (BD Note: The CGQR is a corporate governance  rating system provided by Institutional Shareholder Services on more than  8,000 companies worldwide, evaluates the strengths, deficiencies and risk of a company’s corporate governance practices and board of directors.  Executive and director compensation is one of the variables on which they focus.)

It is difficult to base the effectiveness of a company which as Morningstar defines, is distressed. There are multiple obstacles and problems to solve as the Company strives to climb to profitability from the very bottom.   However, Yahoo Finance does measure “management effectiveness.”  In its most recent figures, which are reflected through December 31, 2005, management effectiveness for return on assets was
-0.72 percent and return on equity was -34.62 percent.

Sales/Marketing Factors

Exide is classified in the electric equipment industry.  According to Morningstar,  Exide has “posted results that are about average for its industry.”  Although Exide’s  return on Assets (ROA)  over the past year was very low,   this factor is not unusual for the electric equipment industry.   

Exide manufacturers and sells Lead-acid batteries to both the automotive and industrial sector -namely motive and network power.   Each market has its own business culture and  trends for growth and profit margins very.

Microsoft Excel ChartIf a  prediction (noted in February 2006)  by Stephen Briffs, an a analyst in London at Societe General SA, comes to pass, production may rise 5.7 percent while consumption may increase only 4 percent.  

The price of lead and batteries are  a “closely knit group,”  Batteries make up 71 percent of all industrial consumption of lead for a Lead-acid battery manufacturer. Lead can represent about a third of the total for “Cost of Goods Sold.” +

The Transportation Market

The Battery Council International (BCI) tracks  shipments of  batteries from its members  to observe industry trends.  At the close  of  December 2005, total OE (Original Equipment) shipments of batteries for  passenger cars, light commercial vehicles were down over 3.5 percent compared with a year earlier (December 31, 2004).  The OE   market is totally dependent on  sales of new vehicles.   However, shipments for replacement batteries for the same categories gained about 1.2 percent.  In comparing the markets for OE and  replacement, the replacement market is a much larger category, totaling over 75 percent of the shipments.    The technological improvements in batteries have created  longer life for each unit and thus, consumers do not need to replace batteries as often as they did five to ten years ago; therefore, replacements have not had strong growth revenues.    

In commenting  on the transportation market in Exide’s report of February 6th, 2006 (reflecting data from December 31, 2005), Exide stated. “Consolidated global net sales in Transportation decreased slightly during the period to $457.4 million from $458.8 million reported in the prior-year period.  These results were primarily due to foreign exchange as the U.S. Dollar strengthened primary against the Euro, and because of lower volume in the Europe and Rest-Of-World markets, which was offset by higher volumes in North America. Warmer-than-expected weather and higher commodity prices adversely impacted volumes in each region’s aftermarket business.  Finally, pricing actions to recover higher commodity costs in each region resulted in erosion of market share as some customers moved their business to lower-priced competitors.”

 Industrial Energy

According to classifications at BCI, there are two main segments in this market - Stationary Power and Motive Power.  The Stationary Market includes: Telecommunications, UPS, Miscellaneous Standby Equipment, Security, Control and Switchgear.  Motive Power market segments include: Industrial Trucks, Mining Vehicles and Railroad/Locomotives.  In December 31, 2004, the North American Industrial Battery Sales from all member vendors of BCI, including Exide,  totalled $1.032 billion.   Exide is a strong player in these markets.

In commenting on its consolidated global net sales in the Industrial category  in its report of February 6th, 2006 (reflecting data from the third quarter ending  December 31, 2005), Exide noted an increase of 2.6 percent over the same period the previous year.  The Company’s consolidated global net sales totaled $276.1 million.  Sales of Network (Stationary) Power increased 28.6 percent and Motive Power sales rose 13.7 percent.  

The Industrial sector tends to have  stronger growth than the Transportation group.  At the April 2005 BCI Convention, BCI statistics  forecasted  that this   market would  continue to grow by  4 percent, with Motive Power in the lead with  6 percent. Forklift trucks and their need for Lead-acid batteries seem to  be heading the pack.    (See chart, Top 3 Segments.)  

Lead Pricing

Lead has been a been a difficult issue for Exide as well as the entire industry.  Based on a chart with sources from ILZSG (International Lead Zinc Study Group), Teck Cominco, and Brook Hunt   presented by Jennifer Coe of Teck Cominco a year ago at the BCI Convention, the North American supply/demand has had a deficit from 2001 through 2004. Although the final figures for 2005 were yet to be forthcoming, the projected forecast was once again a deficit.  For the year 2005, the projected supply (from both mine and refined production) was listed as 1,783,000 tonnes with a  consumption of 1,830 tonnes, leaving a deficit of 47,000,000 tonnes.  North American stock levels fell  as the price of lead escalated.

In January 2006, Exide  raised prices on some of its industrial batteries.  In reference to the increase, Mitchell Bregman, President -Industrial Energy Americas at Exide, said “The market price for lead alone has increased more than 25 percent since our price action announcement on December 1, 2005 from approximately $1,060 per metric tonne to more than $1,330 per metric tonne on the London Metal Exchange.”  However, there has been some relief in lead prices after his statement. Since February 3, 2006, lead has fallen 18 percent.

On April 2006 , C&D Technologies, a competitor of Exide in industrial battery sales, released its  fourth quarter and year end (01/31/06) results. Comments were made regarding lead pricing.  In reference to Standby Power sales,  Dr. Jeffrey Graves, President and CEO,  said, “...higher lead costs put a damper on our short term financial results.”  He also mentioned higher commodity material costs  when referencing the Motive Power Division.   Exide will soon be reporting on its end-of-year 2006 quarter (March 31, 2006) and it is anticipated that lead could play an important role in results, also.

Purchasing lead is a prime challenge.  It is important for Exide to implement lead price escalators in some contracts, consider lead hedging and work with long-term lead supply contracts.  

Competition

Johnson Controls, Inc. (JCI) is perhaps one of  greatest competitors for Exide in the transportation arena.  In August 2002, the JCI acquired Varta Battery to give it a strong presence in Europe.  JCI also recently (June 2005) purchased most of Delphi’s starting, lighting and ignition Lead-acid battery business to boost its  assets.  JCI reported strong earnings on January 20, 2006 and noted that its power solutions sales (batteries) were up 35% to $976 million from $720 million due to increased unit shipments in the Americans and Europe as well as the impact of the Delphi battery acquisition.  

Some, only naming a few,  of the  name brands that compete with Exide are Hawker Energy (one of the world’s largest industrial battery consortia), Optima (a maker of automotive and marine batteries) , EnerSys (an industrial battery manufacturer)    and  Interstate Batteries (a manufacturer of both sealed and conventional automotive and industrial batteries).  

Each company must meet the challenge of lead pricing, lean manufacturing techniques, and quality product to produce a competitive product.  Exide must pull together all its resources to meet the challenge to keep its market share.

A Century of Leadership

Exide is  proud to say that it “holds one of the top three positions in every major market  around the world -  including  network power, motive power, transportation and military/aerospace.”  The Company has a rich history, beginning with the Chloride Accumulator -a storage battery, the first product of the Electric Store Battery Company in 1888.  Later, the company’s name was changed to  Exide, a coined  word combining excellent and oxide.  Exide’s batteries were placed in the first submarine, the first automatic railway switching/signalling system and the first transatlantic “wireless” telegraph transmission.  

With operations  in 89 countries and sales and services in over 120 countries, Exide truly has a global presence. The Company  had total sales of $2,476.3 million  with over 14,000 employees at the end of their fiscal year 2005.  

Exide continues to build quality products.  The Company has provided many batteries for government purposes from the battlefield in Iraq to the Apollo space program.  Most recently (April 9th), Exide was awarded a $7,806,767 fixed-price contract for one Seawolf, five Los Angeles, and two Ohio Class Valve Regulated Lead-acid main storage batteries for the Navy submarine fleet.    

Litigation (and the associated costs) does not seem to escape any company and Exide is no exception.  Recently, Exide received a favorable trademark ruling in a suit involving EnserSys.   The stock tweaked up a little on the news, but has since retreated to lower prices.

Ownership

Top Institutional holders of Exide which have filed Schedule 13G with the Securities and Exchange Commission are Sterling Capital Management, LLC, Tontine Management LLC and Donald Smith and Company, Inc.   A complete list of institutional   investors are listed by Thomson Financial.

Last August, Mellon HBV Alternative Strategies, a hedge fund, took a 9.9 percent position in Exide.  Such positions are taken to make presence as an activist group, which because of its size, can press for changes in corporate governance.  It is not known if the stock has since been sold by the fund.  

Looking Ahead

Exide’s 2006 fiscal year ended on March 31, 2006 although data from the results will probably not be forthcoming until sometime in May.  In addition, BCI will hold its annual convention in the first week of May  Here  the economy affecting the battery industry, issues within the industry, and predictions and forecasts for shipments will unfold.  BD will report on Exide’s results and the Convention.  Look for updates in the next issues.
BD